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Company Acquisitions
Issue and Case Analysis: Company Acquisitions
Question 1: Merge the acquired company into your company. The result of this strategy will be one company containing the elements of both companies.
Since 1990s, there has been an accelerated pace of global mergers and company acquisitions as companies use them as a tool for competitiveness and to expand to global markets. A strategic manager must carefully look into both the pre-acquisition phase and the post-acquisition phase to execute a successful acquisition (Lasserre, 2003).
When the value of operational synergies of the companies operating in similar business contexts is expected, the absorption mode is appropriate. This enables necessary consolidation and rationalization necessary, to occur in the soonest time possible. The company is able to evaluate the best business practices to be adopted and find sources of savings by absorbing the competencies and competitive products of the other company (David, 2012).
The challenge in absorption occurs when there’s rationalization by the company being acquired hindering the process due to resistance to change and difference in culture. A SWOT analysis of the new merger would help to identify the areas to strengthen and areas of potential threats that may hinder successful acquisition (Lasserre, 2003).
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Question 2: Operate the acquired company as a separate business entity. The result of this strategy will be two separate companies under one senior management “umbrella” (the senior management team that is responsible for running both companies).
Where the company is allowed to operate as a separate business entity, Preservation Mode, is when very few operational synergies can be gained. This is important when large autonomy of decision making in the acquired business is required. The existing management is kept in place while the parent company learns the ‘rules of the game’ of the new business. The benefits accrued include enlargement of products and markets and also the transfer of new competencies or resources.
The disadvantage is the acquired company could behave opportunistically by ‘siphoning off’ resources of acquirer if there’s ‘weak’ management (Hitt, Ireland & Hoskisson, 2011). A balanced scorecard could be used to measure the acquisition in terms of customers’ opinions and views, financial position and advantages, improvement and value creation through growth and learning among others.
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According to David (2012), research shows twenty percent of all mergers and acquisitions are successful, approximately sixty percent produce disappointing results, and the last twenty percent are clear failures. Continuous evaluation and correction after acquisition is a critical factor to avoid the pitfalls that result in failure of acquisition (Lasserre, 2003).
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Company Acquisitions
Issue and Case Analysis: Company Acquisitions
Question 1: Merge the acquired company into your company. The result of this strategy will be one company containing the elements of both companies.
Since 1990s, there has been an accelerated pace of global mergers and company acquisitions as companies use them as a tool for competitiveness and to expand to global markets. A strategic manager must carefully look into both the pre-acquisition phase and the post-acquisition phase to execute a successful acquisition (Lasserre, 2003).
When the value of operational synergies of the companies operating in similar business contexts is expected, the absorption mode is appropriate. This enables necessary consolidation and rationalization necessary, to occur in the soonest time possible. The company is able to evaluate the best business practices to be adopted and find sources of savings by absorbing the competencies and competitive products of the other company (David, 2012).
The challenge in absorption occurs when there’s rationalization by the company being acquired hindering the process due to resistance to change and difference in culture. A SWOT analysis of the new merger would help to identify the areas to strengthen and areas of potential threats that may hinder successful acquisition (Lasserre, 2003).
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Question 2: Operate the acquired company as a separate business entity. The result of this strategy will be two separate companies under one senior management “umbrella” (the senior management team that is responsible for running both companies).
Where the company is allowed to operate as a separate business entity, Preservation Mode, is when very few operational synergies can be gained. This is important when large autonomy of decision making in the acquired business is required. The existing management is kept in place while the parent company learns the ‘rules of the game’ of the new business. The benefits accrued include enlargement of products and markets and also the transfer of new competencies or resources.
The disadvantage is the acquired company could behave opportunistically by ‘siphoning off’ resources of acquirer if there’s ‘weak’ management (Hitt, Ireland & Hoskisson, 2011). A balanced scorecard could be used to measure the acquisition in terms of customers’ opinions and views, financial position and advantages, improvement and value creation through growth and learning among others.
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According to David (2012), research shows twenty percent of all mergers and acquisitions are successful, approximately sixty percent produce disappointing results, and the last twenty percent are clear failures. Continuous evaluation and correction after acquisition is a critical factor to avoid the pitfalls that result in failure of acquisition (Lasserre, 2003).
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Geox case study
Case analysis: Geox shoe company
GEOX: BREATHING INNOVATION INTO SHOES
The impact of innovation has been increasing in the recent few years. Innovation is taking place in all products including shoe manufacturing factories. Mr. Palegato’s story points to “necessity” as the driving force behind innovations.
However, we also learn that most innovation ideas are not put to use due to lack of ability to implement them. He approached different shoe manufacturing firms who did not buy his idea of ‘breathing shoe’ product.
Product diversification and development is seen as another driving force behind the success of many companies. Geox Company realized the importance of product diversification and extended their breathability technology into fabric products. Geox embraced innovation in its operation which gave the company a competitive advantage.
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Important points
Geox history
GEOX: BREATHING INNOVATION INTO SHOES
Continuous innovation is necessary for the survival of human race due to the ever changing natural demands. Product development is essential for company’s performance in the current competitive world markets. Though initially started by manufacturing shoes for the children, Geox extended breathing technology into jackets and other fabric items.
The company invested heavily in research and development by involving engineers and best universities. The company carried out continuous experiments in its state of the art laboratories, continuously generating new research ideas for the company.
Patents and copyright laws are important in driving innovation. Gaining patent rights has helped many companies to survive in the world market. Geox shoe producing company is known for innovation and company patent rights have been protected sufficiently and their innovations are not under threats of copying and imitation by its rivals.
Geox investments in research and development yielded a stream of patents; over 50 patents were obtained to its name by September 2009. There were patents related to equipment, machinery and even processes and materials.
Smart people with smart ideas have always found their way out just like Mr. Polecat. Although most people are creative, many lack the ability to translate their good ideas into business opportunities. Engaging in marketing research gives any given company an opportunity to be competitive.
Technological development is necessary to support innovations. Goex did not enter into main shoe market until they introduced a different technology in their breathing technology to help them expand into producing sports shoes. Technology is seen as a pre-condition for innovation. Innovation alone cannot guarantee good performance of company products especially in the fashion-mindful shoe industry.
Competition should not deter the implementation of business ideas. Fierce competition in the shoe manufacturing sector did not deter Polegato from pursuing his business idea. Instead it helped him come up with better ideas to win customers. Competition from other players in the industry helped the firm to grow in strength.
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Global footwear industry
The world market is growing and more so the demands for shoes just like other goods and services. The USA provides the biggest market for shoes although Asian market is growing rapidly. This market is highly segmented hence provides manufacturers the opportunity to specialize, for instance in casual wear, children and sports.
Market segmentation gives new entrants an opportunity to venture into big market by starting off with a particular market segment and later expand into the bigger market. Geox entered the shoe market by producing shoes for children before venturing into the larger market.
We should be flexible and avoid sticking to our areas of specialization all the time. Although specialization has been found to increase individual competence in a particular area, overspecialization may lead to loss of opportunities for many people. Having interest in things outside your area of expertise helped in establishment of Geox company which is quite different from Polegato’s areas of specialization.
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Geox profile
Setting clear company objectives is necessary for the performance of any company. Geox Footwear Company just like other firms in footwear industry has clear objectives that guide their operations. Their operations are lined towards achieving the set objectives.
Outsourcing is necessary for cutting costs and helps in saving costs associated with setting up new firms in a new area. The money saved can be utilized in other areas that are more demanding. For instance, Geox outsourced its production to Asian shoe factories which contributed over 95% of its total production. Outsourcing was the company’s easiest way of entering new markets of Asia without necessarily installing full operational plant.
Brand name is necessary marketing tool for company products. Geox name had been established as a popular brand name across the globe, this acted as a major marketing tool for its products. Company brand name differentiates its products from those of its competitors and is easily accepted in the market without even much advertisement and sales promotion.
However advertisement and sales promotion plays a crucial role in popularizing company products. However, communication strategy determines the effectiveness of advertising to the audience.
A well established distribution channel is equally necessary for company performance. Customers require goods when they need them and this depends on the efficiency of company’s distribution network. Geox had excellent distribution network spread across the globe of over 10,000 multi- brand stores and 997 single stores Geox stores located in major world cities.
Staff development through training and promotion cannot be underestimated. Staffs need to be motivated to give their best in terms of performance. For instance, Geox School was established in 2001 which was training school for both new recruits and company staff.
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Footwear key players
Footwear industry is one of the most competitive industries in the world today. The major players includes boss holdings, brown shoe company, coach inclusive company, Iconix Brand Group, Rocky Brands, skin Inc. among others.
However, challenges are inevitable and companies should be prepared for the challenges that arise. For instance, global economic downtown exhibited in 2009, adversely affected Geox just like many others.
However drastic measures are called for to overcome external challenges. For example, the company halted its expansion strategy until the period of economic recovery to consolidate its weakened financial status. In most cases, strategic change is necessary to minimize production and operational costs sometimes leading to the laying off some staff to cut down company costs.
Opinion
From the story of Mr. Mario Polegato and Geox Shoe Company, we realize that most innovative ideas are left unutilized due to lack of ability to implement them. It’s my view that had not Mr. Polegato had the ability and means to raise funds to implement his breathing shoe technology, the idea could have been wasted.
Innovation is key for survival of any company in the evolving world market hence patenting laws need to be enhanced to promote innovation. Governments should embrace the idea generation to encourage creativity among its citizens.
Companies should carry out industry and external market analysis to inform its strategic marking process. Analysis of industry will assist in establishing company strengths and weaknesses as well available opportunities to exploit, and threats posed by the industry players. External analysis will prepare the company for unforeseen challenges and benefits.
Investment in research and development should be accompanied with investments in new technology and infrastructure that provide conducive environment for the function of companies. Globalization and opening of borders have greatly contributed to the growth of many firms by offering markets for their goods and services.
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Conclusion
Innovation is taking its rightful place as the main weapon for company survival in the global market. Therefore, this noble concept should be supported by all governments and major players tasked with regulation of trade and patent rights. Technological development, political stability, favorable economic environment and ecological and social factors have both negative and positive influence on performance of manufacturing firms. Companies should always be prepared for the unforeseen circumstances that have led to downfall of many companies in the past.
Reference
Ali Farahoomand. (2011) Breathing innovation into shoes; Asia case research Centre, University of Hong Kong. POON Kam Kai series; 10/472c
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Foreign direct liability
Critically analyse what you understand by foreign direct liability
And
Critically evaluate the legal obstacles in regulating the activities of multinational companies.
An analysis of Multinational corporation operations and foreign direct liability.
Foreign direct liability
Introduction
Over time, parent companies mostly in developed countries have set their sights on foreign markets. This has led to an increased number of multinational companies. Multinational companies (MNCs) are defined as enterprises that have production and delivery services in more than one country.[1] Thus, the location of the company’s headquarters is referred to as the home country while the host countries are the other countries that it has invested in.
This has been facilitated by increased competition and globalization. Driven by the motivation to maximize profits, these companies have extended their boundaries all over the world. Most of them have even penetrated what would be termed as high risk areas. These are mostly war torn countries or those that have poor governance relating to dictatorial leadership.
In their quest to set base in foreign markets, these companies have to interact with the locals. Foreign direct Investment has experienced exponential growth in developing countries. World trade has exceeded $15 trillion over the last three decades. In the 1990s, a large portion of external finance in developing countries was attributed to foreign direct investment.[2]Their presence in these markets has led to great benefits.
Not only do the people benefit from employment, but impartation of new skills. Moreover, the multinational companies introduce new technology and knowledge[3]. In addition to this, the entry of multinational companies into these markets has put the developing nations on the trade map. Their entry has also contributed to the utilization of a country’s resources.[4]
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In order for these companies to establish themselves, they consider certain factors. These are known as the push and pull factors. The push factors force the companies from their home countries whereas pull factors lure them to new locations. Market based factors consider labor costs, information skills, investment incentives and management prowess. Efficiency based factors include common governance, economy of scope, production incentives and product specialization.
Strategic based factors on the other hand consider market access, distribution of the product, customer access and performance and input quality protection. Lastly, resource based factors are another key consideration. These include availability of capital and natural resources, supply stability and market controls.
In choosing to establish themselves in host countries, the MNCs are forced to adapt to the standards set by the jurisdiction they’ve chosen to operate in. Hence they align their production processes to the demands of the host country. With regards to labor costs, MNCs trend over the years is to pay the workers in the developing countries low wages.
It should be noted that once MNCs establish enter foreign markets, they become vulnerable to arbitrary government actions such as sudden contract renegotiations, being forced to but licenses or arbitrary withdrawal of the same or in some instances, expropriation.
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Nevertheless, MNCs play a major role in any market they enter. They impact government policy significantly. They influence how the government formulates policies regarding the country’s economy. Where the policy does not favor the multinational corporations, they threaten to withdraw from the market.[5] This is especially common with MNCs that have monopoly in a particular sector. Countries like the United States however, have managed to curb this through the presence of domestic market competitors.
Another avenue provided for MNCs to influence government decision is through lobbying. In the United States, an individual or group’s ability to lobby is enshrined in the right of petition contained in the Amendment to the United States Constitution.[6] Lobbying in the United Kingdom is considered as a way of promoting democracy. A statutory register for lobbying and lobbyists was recommended by the House of Commons Public Administration Select Committee.[7]
In the European Union, lobbying is done with the aim of influencing the European Parliament, the Council and the Commission.[8] Multinational corporations lobbying is directed at a range of issues such as the tariff structures and environmental regulations. Their purpose for lobbying on some of these issues is to filter out competitors. For instance, if a multinational company pushes for stringent standards on environmental safety, any other competitor that is unable to meet the requirements is automatically locked out.
Wal-Mart, a multinational corporation in the USA benefited from the zoning laws that created barrier to entry for other companies.[9] The zoning laws spelled out the areas that could be developed and for what purpose, regulating building heights, lot coverage and other aspects pertaining to land use.[10]
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In maintaining monopoly in a given sector, these corporations acquire patents. For instance, Adidas, renowned shoe manufactures, holds a patent to protect its shoe designs whereas Microsoft holds a software patent.[11]
International law and treaties.
Besides the individual national laws that govern sovereign states, the public international law was instituted to govern the relationship among sovereign states.[12] Hence, multinational corporations are affected by the international law. Increased global trade, environmental degradation and human rights violations have increased the importance of international law which is used to govern these issues.
In addition to this, international law is used to solve disputes that arise from the interpretation of and implantation of national laws.[13] The sources of international law are customs and treaties. Treaties result from consent to follow them by a number of countries while customary international law emerge from practices carried out by nations that believe they ought to be part of international law.[14]
Customary law has been used by environmentalists to affirm the need for countries and corporations to take care of the environment. This is clearly outlined in Principle 21 of the Stockholm Declaration and Principle 2 of the Rio Declaration.[15] These principles give the countries the right to exploit their resources but not to the extent of damaging the environment of areas beyond their jurisdiction.
Several treaties have also been established in relation to environmental protection. For instance, 2001 Stockholm Convention on Persistent Organic Pollutants prohibits the use of certain chemicals while putting restrictions on the use of others.[16] Nuclear and air pollution is also regulated by the International Convention on Oil Pollution Preparedness. Voluntary Corporate Codes of Conduct have also been established. The ISO 14000 established by the International Organization for Standardization is a set of environmental management standards that corporations voluntarily adopt to prevent pollution.[17]
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Foreign Direct Liability.
The negative impacts of multinational companies have led to the emergence of the foreign direct liability concept. The negative impacts have driven the locals to seek legal action against the multinational companies in their home countries.[18] The claims often relate to negative environmental and health impacts on the locals caused by a company’s operations in the area. For instance, in the US, cases have been brought forth against Union Carbide, Texaco, Unocal and Freeport McMoRan.
Union Carbide, a US based corporation invested in India. On December 3, 1984, the plant experienced a gas leak that killed 3,787 people and another 8000 that died from gas related diseases. [19] Immediately after the catastrophe, the company, Indian and U.S governments embarked on legal proceedings. The CEO of Union Carbide, Warren Anderson was summoned to the US Congress.
Not satisfied, in March 1985, the Indian government formulated the Bhopal Gas Leak Act that mandated it to be the legal representative of the victims.[20] The case was later transferred to India for hearing. This was challenged by Union Carbide management but was not supported by the US courts. In June 2010, 7 of the former UCC employees were convicted for negligence that caused the deaths.
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This is just one of the cases where foreign citizens have sought litigation in the home countries. As seen in the Bhopal case, due to failure to determine under which law the case was to be heard, there was a lot of back and forth between the Indian and the US government. Consequently, those responsible for the 1984 disaster were convicted sixteen years later. This clearly outlines the need to harmonize the legal systems between the home and host countries. Whenever a multinational company invests in another country, there should be clear guidelines on how cases involving the locals will be handled.
Foreign direct liability may have an impact on corporate performance.[21] Since the litigation process is an expensive course and in the event that the corporation losses against the plaintiffs and are forced to compensate them, then this is a factor that would cause the corporations to rethink their actions in the host country. Therefore, foreign direct liability may push them towards implementing risk management strategies.
In addition to this, the home countries can however play a role in regulating the influence of multinational corporations in the host countries in terms of the foreign direct investment.[22] The home country governments can limit the amount of investments an MNC can have. This will help to reduce their monopoly in foreign markets.
However, the MNCs have devised other means of avoiding foreign direct liability.[23] Among the measures they use is contracting what they view as the risky parts of their activities to subcontractors. Secondly, they insulate the parent company from any claims by separating the day to day management of the parent company from those of its subsidiaries.
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Another factor to be considered is the involvement of the local government in the corporations’ activities. They take part as business partners or beneficiaries. Hence, the host governments are likely to turn a blind eye on the MNCs activities.[24] This makes the victims’ quest for justice a big challenge. Worse yet is that even if the victims win and are to be compensated, the local subsidiaries may not be in a position financially to fulfill their obligations.
When analyzed from a corporate social responsibility (CSR) point of view, it ought to be the responsibility of these corporations to ensure that their workers have favorable working conditions.[25] By this, they should apply the same standards they apply at home in the host country. The issue of different standards at home and abroad should not arise. Hence, the best environmental and health standards should be applied wherever they choose to invest.
On the other hand, foreign direct liability opens up the host country to impositions by the home country.[26] The home country courts are likely to demand to have their way with regards to the host government’s choices. They may demand very high standards that the host government may not be in a position to meet based on the developing countries’ status. In the event that a disaster occurs, then the company together with the home government absolve themselves from any responsibility laying the blame on the host government for failure to implement their recommendations.
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Political, legal and social risks.
Besides this, multinational corporations face a lot of risks in their foreign operations. They are forced to deal with additional costs arising from their unfamiliarity with the foreign market, discrimination from the customers, suppliers or government entities[27]. Moreover, other costs are associated with international operations.
Multinationals also stand the risk posed by political decisions arrived at by a country’s governance.[28] Political changes that alter the expected outcome of a given economic action determine the probability of a company’s prosperity in the given country. These risks may be classified as micro-level political risks and macro-level political risks.
Macro-level political risks do not only refer to country level political risks, rather it is a coupling of local, national and regional political events. These risks may result in confiscation or seizure of a businesses’ property. Micro-level political risks on the other hand may be termed as project-specific risks. These risks tend to favor the local industries compared to multinational companies.
Micro risks arise from prejudicial actions or corruption. A good example of how companies can suffer from political risks is illustrated by Cuba. Following Fidel Castro’s takeover of Cuba in 1959, American owned assets and companies were expropriated as explained by Simon.[29] These companies incurred losses to the tune of hundreds of millions of dollars.
Macro level risks can be mitigated by the company understanding the political uncertainties of the host country. At the micro level, political risks can be mitigated through political risk insurance and hedges. Institutions such as Multilateral Investment Guarantee Agency (MIGA) and Overseas Private investment Corporation (OPIC) are just but a few of the public sector insurers that provide project specific political risk insurance.
Through insuring investors, MIGA promotes foreign direct investment in developing countries[30]. OPIC is an American based agency that mobilizes the private sector to invest in new and emerging markets. Portfolio of investments can be covered by private market insurers. Political risk insurance covers a variety of risks that the investor may face. These are currency inconvertibility, expropriation; loss of an investment due to confiscation by the host government; and political violence.
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In addition to this, legal risks are another challenge for MNCs. This results from a lack of clear guideline on the law applicable when a legal matter arises. For instance, the foreign direct liability cases prove to be a challenge as to which law to apply in determining the cases. The difference in the legal cultures of the host and home countries become barriers to the resolving of such cases.
Social risks on the other hand arise from crimes, violence and racial discrimination.[31] Multinational companies tend to be victims of crimes. This may be attributed to lack of confidence by the locals in their operations.[32] To add to this, people’s perception about a company influences the decisions they make. Multinational companies fall prey to this menace especially from customers who may view a company in a particular way. Wrong perception may also arise from lack of information about a company’s operations.[33]
Wal-Mart Company has faced a series of criticism from labor organizations, human rights activists and other entities.[34] This has given their consumers a negative perception about the company. Apart from this, multinational companies face racial discrimination from locals in the host countries. The domestic markets have a higher tendency of favoring the local industries compared to the foreign companies.
One of the ways of mitigating social risks is through corporate social responsibility.[35] Creating programs that help the MNCs keep in touch with the locals serves a good strategy to deal with the perceptions the locals may have about it. Some of these programs include creating social events where both parties can interact such as fun days for the employees. In addition, some MNCs have gone ahead to engage in programs that meet the needs of the locals such as establishing schools, providing water and other social amenities. Moreover, transparency about the companies’ operations also contributes to mitigating social risks.
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Conclusion.
In conclusion, multinational corporations are companies that have extended their operations from the home countries to foreign markets that are referred to as the host countries. These companies take into consideration the viability of the foreign markets before they establish themselves. Their entry into the host country implies involvement of the locals in the company’s operations. In addition to these, international laws have been put in place to govern the management of resources with respect to health and environmental safety.
Multinational countries tend to have different standards in the home and host countries. This gives rise to foreign direct liability. Access to justice is the underlying issue in foreign direct liability. The victims in most instances seek justice in the home country. However, this is still a foreign concept to many countries. As seen, multinational companies face several risks including legal, political and social. All in all, there is a need to develop a strategy where foreign direct liability is handled amicably and justice is served. Moreover, multinational companies need to not only be driven by the desire to make profits but work towards corporate social responsibility.
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BIBLIOGRAPHY
Book sources:
Aitken J.Brian and Harrison E. Anne, “Do Domestic Firms Benefit from Direct Foreign Investment? Evidence from Venezuela,”, p.1, June 1999.
Barber, Jeffrey, “Responsible Action or Public Relations? NGO Perspectives on Voluntary Initiatives,” Industry and Environment, 1998.
Barnett, Richard, Global Reach: The Power of the Multinational Corporations, 1975.
Enneking , F.H. Liesbeth, “Crossing the Atlantic? The political and legal feasibility of European Foreign Direct Liability Cases,” The George Washington International Law Review, p 903, 2009.
Handl Gunther and Lutz, E. Robert Transferring Hazardous Technologies and substances: The International Legal Challenge, 1989.
Helleiner, K. Gerald, “Transnational Corporations and Direct Foreign Investment Handbook of development economics. Amsterdam: North-Holland, 1989.
How managing political risk improves global business performance,” PwC Advisory and Eurasia Group, 2006.
Hymer, S, The International Operations of National Firms: A Study of Direct Investment,
MIT Press, Cambridge, MA. 1976.
Jenkins, Beth; Kutle Beth and Bekefi, Tamara, ‘Social Risk as Strategic Risk’, Corporate Social Responsibilty Initiative, December 2006
Lefcoe, George, “The Regulation of Superstores: The Legality of Zoning Ordinances Emerging from the Skirmishes between Wal-Mart and the United Food and Commercial Workers Union,” April 2005.
Luo, O. Shenkar, and Nyaw,M., “Mitigating liabilities of foreignness: defensive versus offensive approaches”, Journal of International Management, Vol. 8 No. 3, pp. 283-300. 2002.
Luo, Y., “Market-seeking MNEs in an emerging market: how parent-subsidiary links shape overseas success”, Journal of International Business Studies, Vol. 34 No. 3, pp. 290-309, 2003.
Mezias, J.M., “Identifying liability of foreignness and strategies to minimize their effects: the case of labor lawsuit judgments in the United States”, Strategic Management Journal, Vol. 23, pp. 229-44, 2002.
Magraw, Barstow Daniel International Law and Pollution, 1991.
Santoro, M., Should LDCs love MNCs? Foreign Policy, 128, 94-96, 2002.
Sethi,D and S. Guisinger,S., “Liability of foreignness to competitive advantage: how multinational enterprises cope with the international business environment”, Journal of International Management, 2002
Weiss, Brown Edith; Barstow Daniel and Szasz, C.Paul, International Environmental Law: Basic Instruments and References, 1992.
Journal and other publications:
Kierkegaard, Sylvia, How the Cookie (almost crumbled). Computer Law and Security Report Vol.21 Issue 4, 2005.
Kyle, Beth and Ruggie, G. John, “Corporate Social Responsibility as Risk Management” Corporate Social Responsibility Initiatice Working Paper, Cambridge MA: John F. Kennedy School of Government, Harvard University, 2005.
Simon, D.J., “A Theoretical Perspective on Political Risk”,), Journal of International Business Studies, Vol. 15, No. 3,Winter, 1984.
[7]Public Administration Select Committee < http://www.parliament.uk/business/committees/committees-a-z/commons-select/public-administration-select-committee/> (accessed on 30Nov 2011)
[8] Kierkegaard, Sylvia, How the Cookie (almost crumbled). Computer Law and Security Report Vol.21 Issue 4, 2005.
[9] Lefcoe, George, “The Regulation of Superstores: The Legality of Zoning Ordinances Emerging from the Skirmishes between Wal-Mart and the United Food and Commercial Workers Union,” April 2005.
[20]“Chronology”. Bhopal Information Center, UCC. November 2006.
[21] D. Sethi, and S. Guisinger, “Liability of foreignness to competitive advantage: how
multinational enterprises cope with the international business environment”, Journal of
International Management, 2002.
[22] Santoro, M., Should LDCs love MNCs? Foreign Policy, 128, 94-96, 2002.
[23] J.M. Mezias, “Identifying liability of foreignness and strategies to minimize their effects:
the case of labor lawsuit judgments in the United States”, Strategic Management Journal,
Vol. 23, pp. 229-44, 2002.
[24] Liesbeth F.H. Enneking , “Crossing the Atlantic? The political and legal feasibility of European Foreign Direct Liability Cases,” The George Washington International Law Review, 2009, p 903.
[25]Y. Luo, O. Shenkar, and M. Nyaw, “Mitigating liabilities of foreignness: defensive versus
offensive approaches”, Journal of International Management, Vol. 8 No. 3, pp. 283-300. 2002.
[26] Y. Luo,,“Market-seeking MNEs in an emerging market: how parent-subsidiary links
shape overseas success”, Journal of International Business Studies, Vol. 34 No. 3,
pp. 290-309, 2003.
[27] S. Hymer, , The International Operations of National Firms: A Study of Direct Investment,
MIT Press, Cambridge, MA. 1976.
[28] How managing political risk improves global business performance,” PwC Advisory and Eurasia Group, 2006.
[29] D.J.,Simon, “A Theoretical Perspective on Political Risk”, (Winter, 1984), Journal of International Business Studies, Vol. 15, No. 3. (pp. 123–143).
[35] Beth Kyle and John G. Ruggie, “Corporate Social Responsibility as Risk Management” Corporate Social Responsibility Initiatice Working Paper, Cambridge MA: John F. Kennedy School of Government, Harvard University, 2005.
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Business operating environment
How does lobbying, the news media, private politics, and corporate social responsibility affect accountancy.
A business operating environment consists of both market and non market segments. Organizations overall performance largely depends on how well market and non-market activities are incorporated. The non market environment is composed of issues; which are considered the basis for non-market action, interests; which revolve around persons or groups that have a financial interest in the organization, information; which refers to the level of knowledge that the interested parties had concerning the non market actions taken and their outcomes and institutions; which are generally government and non-governmental bodies, the media and the public perceptions.
To come up with an effective non-market strategy, the management must carry out a thorough assessment regarding the prevailing environment. Analyzing the current environment allows the organization to predict with some degree of certainty how the environment shall be in future order to formulate effective strategies moving forward.
Business operating environment
Analysis of non-market issues
Writing in the influential management magazine, the MIT Sloan management review; authors David Bach and David Bruce Allen note that Nonmarket strategy appreciates that apart from being economic entities, businesses are also political and social agents. They add that since a variety of groups understand that businesses generate and distribute wealth, they seek to sway the operating environment (in their favor) using both formal and informal means.
Formal means include legislation while informal may take the form of methods such as petitioning, activism and others in order to influence the public’s view of the business (45). To properly understand the dynamics of non market, we must first comprehend its components.
According to the article the Non-Market Environment of Business Non-market issues can be systemic meaning issues which stem from changes in population size and composition, climate change, wealth proliferation and economic policies. A subset of the population forms the target market for the business and therefore changes in its size, structure and/or distribution will definitely affect the firm’s environment.
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Changes in weather patterns present a new set opportunities as well as challenges to a business. Extreme weather changes can affect the target market ability to buy and disrupt crucial supply chains. The business needs to be ready to adapt. Government actions on the operating environment are critical in the long and short run. Issues arising from taxation, interest rates, licensing and others need to be anticipated and dealt with.
We also have organizational non-market issues. Organizational issues are specific in nature. The organization needs identify them and determine what impact they shall have on the organization. Appropriate measures then need to be put in place to mitigate any adverse effects they might have on the business.
Finally, nonmarket issues can also be individual. This refers to how persons within the organization deal with the issues. Every individual has their own disposition and manner of dealing with issues. The relationship between a businesses’ representative and personnel representing the government in a government agency defines the businesses’ relationship with that body. If it is cordial, then the firm can expect favorable exchanges with that body.
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Accountancy and non-market issues
Accountancy refers to all the activities that involve the collection, analysis and dissemination of businesses’ fiscal information to the management, government and tax authorities, shareholders and other users. From the onset then we can clearly see its link with non-market issues. For instance, the organization has to file its annual returns with the tax authorities where the data provided is scrutinized for any irregularities. The level of scrutiny subjected to organizations financial reports might be dependent on its relationship and prior encounters with the taxman.
Lobbying and accounting
Lobbying is considered as all those acts aimed at swaying legislation in one way or another. There is level of lobbying permitted by most governments. Legislation which is likely to have a substantial bearing on a businesses’ environment is likely to be supported or contested by way of vigorous lobbying. However this should be done within the law and firm’s in most countries are not allowed to make overtures directly to members of the legislature.
Lobbying by industry or accountants is usually done maintain the status quo, to resist proposed new standards or to support them. A common technique used by businesses’ or auditors who are unhappy with the present standards is to actively lobby the institutions charged with setting standards. In most countries, their assertions form the basis for drafting new legislation (O’Regan 33).
Each firm has its own practices regarding reporting methods, the amount of financial information revealed to stakeholders Organizations accounting policies have to be in harmony with the existing laws. governing accounting. Given that, it goes without saying that any legislature that would be favorable towards organizations accounting practices would receive its backing by way of vigorous lobbying. Most firms are opposed to stringent accounting standards for a variety of reasons.
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Human beings are naturally resistant to anything that alters the prevailing status particularly if they are comfortable with it. Fischer, William and Cheng while discussing the harmonization of global accounting standards contend that they expect active resistance from the accounting fraternity (28). They note that the reason for this defiance is the need for the accountants to familiarize themselves with new reporting designs, and the increased workload that come with it.
There is the general feeling among auditors that tried and tested techniques which are proven to work need not be replaced. According to Fischer et al, accountants may sometimes oppose new standards for actual or imagined reasons (11). Adequate training and familiarization with the new working environment however soon removes the pockets of resistance.
However some reasons for opposition to change are not as mundane as simple fear of the unknown. Businesses’ engage in trade to make money and will actively resist any move that threatens their profits. For example a bill may come up that aims to classify an item that is listed as tax exempt as becoming taxable. In such a scenario, affected firms are likely to advance a furious lobby to fight the offensive piece of legislation.
A considerable number of amendments to accounting standards are with regard to transparency and disclosures. Thus firms seeking to conceal the true picture concerning their financial status of the business to stakeholders, creditors and the government fiercely lobby against any such amendments.
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It is certain that change to accounting and accounting standards will be a permanent feature of the profession as it is with others. The introduction of technology to accounting means that any credible and modern accountant should at least have some working knowledge of an accounting application. Governments and the tax authorities now require the reporting and filing of periodic reports online.
All these changes have been passed through amendments to existing laws. This does not mean that there has not been active resistance through lobbying and other means including industrial action. This merely shows that the wave of change is unstoppable in accountancy as it is in all other sectors.
Works Cited Page
Bach, D, & Allen B. What Every CEO Needs to Know About Nonmarket Strategy, (2010)
Fischer, P, M, Taylor, W, J, & Cheng, R, H. Advanced Accounting, Cengage learning, (2011)
O’Regan, D. International auditing: A practical resource guide. John Wiley and Sons. (2003).
